Many would argue that some degree of regulation in the crypto space was both inevitable and needed. However, what regulators typically refer to as “measures to ensure public safety” can go to the extent where they stifle the industry.
Often the focus is on cyber crime and how various laws and interference prevent bad actors from abusing the crypto space. Brookings.edu mentions the case of Ilya Lichtenstein and Heather Morgan, where the couple laundered over $4 billion in cryptocurrency they stole from the Bitfinex exchange in early 2022.
It was not the first, and hasn’t been the last example of such a thing even just this year.
However, there’s the other side of that.
Heavy regulation stifles growth and discourages collaboration.
In order for entrepreneurial crypto endeavors to take off, particularly for someone living in the U.S., they need to be able to viably participate in a global market. This is complex, obviously, since the crypto industry involves many countries with varying rules, tax implications, and legal hurdles.
For some projects, the easiest way to remove red tape and unnecessary burden from operation is to exclude participation, or at least aspects of it, for countries that are particularly problematic in those ways.
One company setting up staking in Ape Coin recently said it will not be available to U.S., Canada, N. Korea, Iran, Cuba, Russia, Crimea, Donetsk, and Luhansk. Other times we see things like crypto websites rewarding early adopters/users with payouts after a year, but only doing so for users in certain countries.
When something like that happens, those in the U.S. are very often on the “no-fly list.”
That may put founders of an international venture in an uncomfortable position where they know developers or investors in the U.S. they would like to include, but also feel they need to bar entry because otherwise the whole project becomes contaminated by U.S. regulations. In other words, the minute an American gets involved at that level the project is subject to U.S. rules or else the whole venture can face fines, lags, or legal hurdles.
Others in the crypto space I’ve talked to say they feel this means that longer term it’s likely means the U.S. will be able to keep up or remain competitive in the space.
A Few Examples of US-Based Crypto Projects That Have Shut Down Due To Regulation:
EtherDelta was a decentralized exchange built on the Ethereum blockchain that allowed users to trade Ethereum-based tokens directly with one another — without the need for a central authority.
This gave users complete control over their funds, and allowed for fast and secure trades without the need for intermediaries.
EtherDelta was one of the first decentralized exchanges to gain widespread popularity, and at the time was widely considered to be one of the most important players in the decentralized exchange space.
However, the project faced significant challenges due to regulatory issues, as the US Securities and Exchange Commission (SEC) declared that EtherDelta was operating as an unregistered securities exchange.
This led to the platform being forced to shut down.
Still, many people in the crypto space see the EtherDelta project as an important reference point for discussions around decentralized finance, and the future of exchange platforms.
ShapeShift and Kraken shut down because of Bitlicense. BitLicense was a license required by the state of New York for companies engaged in virtual currency activities. The license was widely criticized for its onerous requirements and high fees, making entry into the space or remaining viable once there difficult and often prohibitively expensive.
In the case of ShapeShift and Kraken, complying with the regulations seemed unfeasible, so they each chose to shut down operation.
This is clearly an ongoing development, but remains a concern for those in the space either looking to develop projects, participate in them, or invest in them.